ADP Vs. Paychex: Bank Of America Picks A Winner

Automatic Data Processing ADP and Paychex, Inc. PAYX trade a similar earnings multiples, but one Wall Street analyst says ADP has a unique opportunity that makes it the better overall investment.

The Analyst

Bank of America analyst Jason Kupferberg reiterated his Buy rating and $139 price objective for ADP and added the stock to Bank of America’s US1 list of top American stock picks. Kupferberg also downgraded Paychecks from Neutral to Underperform and lowered his price objective from $66 to $60.

The Thesis

The ADP story is all about margin expansion, according to Kupferberg.

“In F20, we forecast adjusted EBIT margins of 21.4% (vs. Street’s 21.2%), yet we see at least 120bps of margin upside to our estimates if we just consider the impact of a recently announced early retirement program and the implementation of ASC 606 accounting standards,” Kupferberg said in a Tuesday note.

Once the benefits of tax reform are factored in, Kupferberg said ADP could deliver $6.09 in EPS by fiscal 2020.

At this point, mixed investor sentiment suggests the market is waiting for a catalyst from ADP. Kupferberg said ADP has several imminent catalysts, including Q1 earnings expected out on May 2 and an upcoming Analysts Day event on June 12. In addition, Kupferberg said margin expansion would also likely serve as a bullish catalyst.

ADP and Paychex both trade at a PE ratio of about 22, but Kupferberg said Paychex margins are contracting while ADP’s margins are growing, making ADP the smarter buy.

Price Action

Following the new notes and the Paychex downgrade, Paychex stock traded lower by 2 percent on Tuesday, while ADP stock traded higher by 0.8 percent.

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